Joined next by Axalta, a global leader in the coatings industry with a strong focus in mobility, refinish, and aftermarket, building facades and other industrial applications. We're joined here today by SVP and CFO Carl Anderson. Carl's been with Axalta for two years as CFO and previously held CFO roles at XPO and Meritor. So, Carl, thank you for joining us here today. I understand you wanted to maybe just kick us off with some opening remarks.
Sure. Thank you, Patrick. Thanks, everybody, for joining here today on this beautiful day in New York. Just wanted to maybe kick off. So, two weeks ago, we announced a transformational merger between AkzoNobel and Axalta . And I think, as we look at this deal, what the combined company is going to be able to be is a very, it's going to be a powerhouse across the board in all of the end markets we operate. So, with the combination, we will be the number one performance coatings player and company around the globe. We'll be the number two paints and coatings global player. We will have end markets in seven different areas, ranging from aerospace to marine to refinish to mobility. The positions we have from a brand, from a geographical perspective, will be best in class across all of these businesses.
The company was going to have about $17 billion in revenue, over $3 billion in EBITDA, and generate over $1.5 billion of free cash flow. That's what the combined entity will kind of bring. I think, as it looks from a governance perspective, this will be a U.S.-style governance approach as we think about how the board will be put together. The whole premise of the deal was done in a 50/50 type of mindset between the two parties. You can really see that coming through in how the governance is set up. Rakesh Sachdev is the current chair of Axalta. He will be the chair of the new Co. Greg Poux-Guillaume is the CEO of AkzoNobel. He will be the CEO of the new Co. Then I'll be the CFO of the new company as well.
Chris Villavarayan will be our deputy CEO and will be laser-focused on delivering and setting up the company for success as it relates to driving synergies. The board makeup is really 50/50 between the parties. There'll be four Axalta board members as part of the board. There'll be four AkzoNobel, and there'll be three independents. I think if I look at what's in front of us from a value creation perspective, we have the right team, the right governance to deliver very significant value to both shareholders. Specific to Axalta, as I look at it, one of the key themes and why we're very excited about this transaction is that we think there's over 75% value creation in this combined enterprise that we're going to create. We are going to be driving a minimum of $600 million of cost synergies as part of this.
That is important because, regardless of the end markets that we're facing, this is in our control. I think that having, and I will tell you how we feel and how AkzoNobel feels, this is the floor on synergies. We think there's probably even more to go get, but at a minimum, we're going to deliver $600 million of synergies capture on an annual run rate. That alone is worth almost 40% value creation to Axalta shareholders. If I think about what it does from the potential upside above and beyond that is as it relates to where we currently trade. Axalta currently trades with an eight multiple, plus or minus, more minus than plus as of late.
I would tell AkzoNobel is probably nine, but to have value creation, at least from a term or two of additional multiple from a re-rate perspective, also will drive us over the 75% type of value creation as a combined enterprise. Axalta will also benefit from. We're getting three times as much revenue in this transaction from going from $5 billion to over $17 billion. We're going to have three times as much EBITDA and three times as much free cash flow over $1.5 billion. And so, again, as I look at this deal, it's transformational on many levels, but in many ways, we're just going to be beginning the journey as it relates to what we can be doing as a combined company together. So, happy. Just wanted to kind of share that as some background as we kind of get into the discussion.
I think the last important point is, if we think about the back to the 50/50 type of mindset from a deal structure, we will own, from an Axalta perspective, 45% of the new company. And I think that's an important data point because if you look at where the historical trading was on a market cap basis between the two companies over the many, many years and where the spot level was, we're about 35%. So, we're actually going to have 10% more ownership interest in this entity. And that will relate to and be a direct result of creating additional probably $1.4 billion of value because of the ownership to our Axalta shareholders. So, across the board, I look at this deal, it's highly accretive, over 30% EPS accretion as a phenomenal return on invested capital. And we're more than excited.
I would tell you both companies, the employee bases are beyond excited to get this deal done and over the finish line because I think the value upside here is just absolutely phenomenal.
Very helpful, and obviously, post this announcement, there was a lot of emotion out there. You got some pretty public feedback with people sharing their dissent. So, any sort of initial pushback or addressing some of that pushback and why now is the right timing? Why did you ultimately decide on this no premium MOE?
Yeah. Well, I mean, really, there is a 7.3% premium as part of the deal. So, I think there's some little confusion about that. But it's really not the premium as much. This is truly a merger of equals in many ways. And again, I think the upside is what we can be doing together. Scale in our space is extremely important as you think about not only the diversity of businesses and cyclicality that that will help mitigate. But I also think in order to drive these types of synergies, you do need a lot more scale to be able to do that. I think at Axalta, we've had a very good track record of delivering on our cost synergies that we've kind of put forth. And we have a slogan that we use internally, which we're going to be using as we move forward.
It's commitments made, commitments delivered. And I think the track record that we have, and in fairness, the track record that Greg and team Akzo are beginning to do as far as taking costs out, I think is going to set this company up for future success.
I mean, just on you've developed really strong operating cost discipline. You guys have taken a lot of cost out. So, I mean, there was already quite a good standalone EPS accretion story. So, how should we think about that story versus the accretion that this deal provides, and why this isn't just something you could have continued on with your own portfolio?
Yeah. Well, yeah, again, I think as we look at what this deal provides, even factoring all that in, this will be 30% more accretive than the standalone. I think that's one. I think as I look at what the ownership allows us, not only are we getting more of the over $1.4 billion of value from the higher ownership perspective, I also think that what we can be doing together as it relates to revenue synergies, which we haven't even talked about yet, will really help then drive this to just a level that is much more value than we could have done on our own, is how we're looking at it.
I think the other important point is some of the feedback we've received from shareholders as well, "Why don't you just keep buying back your stock like you've been doing, kind of given where you're currently trading?" What's interesting is when you look at the incremental 10% ownership we're getting from this deal, going from 35% to 45%, we're effectively the multiple that we're buying on this EBITDA is about six times. So, it's a much more attractive use, if you would, of capital to be buying essentially into EBITDA at six times than it is buying back their own stock at eight times.
And so, that's why I think what we can be doing together in an environment which traditionally, from a volume perspective, has been more, it's relatively low growth type of overall businesses. The scale and ability to really deliver on the cost side is just much more available here with the larger company.
Understood, and then maybe just on those synergies, I mean, I think we're receiving a lot of questions on feasibility, the timeline to execute, particularly, I think procurement synergies, things like that are relatively well understood. Those are often day one, but this is a large European company that you're merging. So, just try to understand the feasibility of those SG&A synergies and why does the combined entity have a better sort of playbook to execute on those SG&A synergies?
Yeah, Patrick, a couple of points on that. One, when I first joined Axalta two years ago, I heard a lot of that same commentary. "Well, there's been so much cost takeout in the past at Axalta. How much more left there is to do?" Well, we did over $300 million, right, at a much smaller scale, much smaller business. That's one. I think as I look at Axalta's overall geographic makeup, close to 40% of our business is Europe today. So, our team and the AkzoNobel team, we know how to operate in these markets. We know how to drive synergies. And I will tell you that the $600 million, if I can't say it enough, that is the floor of what we're going to be able to do. We did a very detailed analysis of all of the cost synergies rolled up.
And I will tell you, there's always ranges that you kind of come in at as far as what kind of base case up to upside. And what was kind of put together is kind of the low end of the ranges that we developed internally. So, I just think there's just much more upside.
Maybe just on that floor and where you see potential sources of upside, could you help highlight, make real what the potential revenue synergies could look like? Where qualitatively might those areas be?
Yeah. I mean, I think if I look at one of the best things about this transaction, it's the complementary nature of the businesses. AkzoNobel has a strong track record in aerospace, marine, and protective. Axalta is not playing that today. And I think about they have a strong Deco business, but then we have a strong mobility business and refinish business. And so, in many ways, it's very complementary. But in the one area where we both compete in, maybe in different subgroups or sub-functions and sub-businesses with industrial. And that's where I think if I look at the R&D spend of the combined enterprise, it's probably pretty close to $400 million of R&D spend. And I will tell you that there's going to be very significant opportunities as we think about revenue synergies in the industrial aspects of what we can be doing.
I also think having a larger company that we can allocate capital probably combined more effectively to the areas where there's more growth, that will also then play into what we get from an overall revenue synergy perspective. So, we'll begin to lay out this in more detail as we move forward. But I would say we initially wanted to focus in on immediately what we can control, and that's on the cost side on a synergy base. And that's where that $600 million comes in. But there is more upside as we think about this deal on revenue, for sure.
Maybe you mentioned the combined R&D spend there, and it's always maybe an underappreciated part of the coatings industry. I guess, what do you find most compelling from the Akzo side? What do you see or what does Dr. Roop see as the opportunities for cross-platform innovation?
Yeah. Well, I would tell you when we announced publicly, internally anyways, I can speak to that. I would say from the Axalta side and I know from the AkzoNobel side, there is a huge level of excitement. And so, if you think about AkzoNobel's, Dr. Roop's team based not only in Philadelphia, but around the world, having access to four different end markets that were at least three that we don't participate in today, there is excitement about what people and what our phenomenal talented team can be able to do. And then likewise, given the history of AkzoNobel and what they have done over the years as far as on the technology side and the end markets, that collaborative spirit, I think will put us best in class with what we can do with coatings across the globe.
Maybe you've talked about it a couple of times of just this gives you an opportunity to combine scale, but also diversify away from refinish, which is a pretty significant part of the earnings footprint now. Is there perhaps a way or a way to have diversified away in a more stepwise fashion or taken more targeted bolt-ons, medium check sizes to build this business in a different way?
Yeah. Of course, there's different ways to create value, right? I mean, again, I've been here for two years. During this time period under Chris Villavarayan's leadership and myself, we've expanded EBITDA by over $300 million. We've grown our EBITDA margin by over 500 basis points. We've expanded earnings per share by 50%. We've deleveraged the company by 1.2-1.3 turns to the lowest level of leverage in the company's history. And the stock's the same level as when I joined two years ago.
I use that as a framework in this. Yes, there's always different ways, but when I'm staring at a 75% opportunity to create value and the board staring at that level, that is such an enormous amount of opportunity that's in front of us on the combined basis in a business, right, where growth is always going to be a little bit at a premium. I think getting larger, having more diversification, being able to scale and really allocate capital even more effectively on a combined basis. I think it's not only a home run, it's a massive transformational deal that's going to be creating enormous value in years to come.
As you think about decision around dividend distribution, can you talk about the strategic rationale for providing the dividend to Akzo shareholders only?
Yeah. Really, from a structure perspective, as I said, one of the big premises that we had was we wanted both sides really were focused on ensuring this was more of a 50/50 type of transaction. And again, if you think about the special dividend, which is around EUR 2 billion, if you strip out the interim dividends that they'll pay in normal course, that distribution is really just to right-size the ownership splits between the parties, right? So, in order to go from 35%-45% from an Axalta perspective or conversely going the other way from Akzo, the dividend was the mechanic to pull that off.
Again, as I said earlier, I think it's important to note that if you think about, well, that dividend, essentially on a combined basis, the Axalta shareholders are essentially buying that incremental EBITDA of that delta at about a six times ratio, which again is much more attractive than buying back my stock at eight times or nine times wherever we're going to be trading.
Maybe to the extent you can share with us, any assets that you identified that could cause regulatory scrutiny and would potentially require divestments, and would any larger divestments dent the synergy potential at this point?
As I said, we're obviously very early in this process going to the regulatory environment. As I said before, our businesses are highly complementary with the end markets and the businesses that we operate in today. I do think it should be very limited exposure, but it's very early in the process. I think as we evaluate it, we did put forth kind of a timetable to close, 12-15 months. I think everybody is motivated to move and accelerate as fast as we can to get the deal over the finish line. At this point, as I said, I think it's very complementary more than it's not.
Maybe just a related follow-up there, is there anything from combining assets, any potential revenue dis-synergies where there's similar overlaps in the business with having to go out and source additional suppliers as a result of the merger?
Yeah. We really don't see that at all. I think, as I said, given that today Axalta does not participate in aerospace or marine or really much in protective or Deco at this point. And again, conversely, as it relates to what we do in refinish and what we do in mobility, both in light vehicle, commercial vehicle, there's just very limited overlap between the two.
Then just in terms of maintaining supplier or maintaining customer relationships, I think some may see this, and this is an 18-month-plus potential to get this deal done. How are you mitigating potential risks from a competitive standpoint as others may think you're distracted here?
Yeah, well, the one thing I can tell you, well, it's 12 to 15, so I don't think it's important.
Sorry.
It's important because everybody kind of brings up kind of the timing on it. I will tell you that from the Axalta side, we are steadfast in delivering on our 2026 A Plan targets. Nothing will change at all on our side. And I know Greg and the team on Akzo will also be extremely focused on delivering and continuing to add value in what they're doing as we think about 2026. So, I don't lose sleep as far as worrying about just because of the announcement that there's a new distraction. I think both teams are committed to doing everything in their power to continue to execute and continue all the good work that's been done today.
And then just closing the loop here, just lastly, sort of one-to-one ratio cost to achieve synergies, $600 million. You see deals like this or other similar sort of transactions and that number is always subject to change. So, just level of confidence around that number, how ironclad is that?
Yeah. Well, I would say I think it's a very good number as we look at it today. As I said, there's some synergies that will come very, very quickly as we think about that, whether it's especially on the purchasing side. I also think given the amount of work that's going to be done between now and close, as you think about supply chain and how we're moving products internally and externally, there's a lot of work that's going to be done well in advance that you're going to kind of get out in front of. And so, I think that one-to-one ratio is a pretty good estimate as we think that to your point, it can always move around. But I and the team will be extremely focused on moving at speed, having the agility.
I know we put out kind of the time period that 90% of this will be done in three years. That's kind of the base, but we are all going to be working to accelerate that as quick as we can.
Got it. And maybe just moving on to sort of current trends across the business. And I maybe just start high level in terms of where you're seeing things shape up in 4Q. It's often a period of time, which is prone to holiday shutdowns, extended maintenance of customers, more so on the mobility side, but just how is things shaping up relative to your previous outlook?
Yeah. Again, we're not going to talk about the kind of the rest of the guide for the rest of the year, but I will say this. If you think about Axalta's business and mobility, North America on autos, we are seeing some more time down with some of the OEs as they kind of get close to year-end. I think they're taking a little bit extra days, maybe in some cases a week off. There was another fire event in the auto world as well at a key supplier that's creating some type of noise as well. So, again, I think that's all part of what we're facing at this point.
I think the other news that there was, if I think about refinish, I think the refinish business for us is there's always seasonal Q4 to Q3 kind of movements, but it's kind of performing at the very similar levels that we have been the last couple of quarters as well. And so, that's something that we continue to expect as we get into the second quarter of next year that at least for what we see because of what's occurred in that space on destocking, that event with that particular customer should be pretty much behind us at this point. And so, again, I would say as we kind of cross over the year and get into 2026, the company, Chris, our CEO, the board, we're still heavily focused on making sure we deliver on what we put forward on the A 2026 Plan.
And then maybe just on refinish, I mean, I think there's a lot of debate whether this is kind of a perfect storm of destocking, consumer weakness, and some issues with U.S. customers deferring claims. But I think there's also been the debate that's bled through that there's also a structural element to it. So, can you help us understand your view why this is just kind of cyclical and likely to see some stabilization and what, if anything, gives you confidence there?
Yeah. So, I mean, as we look at the data, I think you always start with the frequency of accidents. And I think as we look at state by state and all of the work that's kind of done to kind of get at that data, the frequency of accidents has really not changed much over the years. And so, I think the secular concern over ADAS or autonomous or is we're just not seeing that in the data. So, I think that's kind of important. I think too, given consumer behaviors and just the overall inflation costs catching up over the many years following COVID, the higher insurance premiums has played a fact into this. And what we've been noticing lately is insurance premiums have begun to level out. In some cases, they're beginning to decline. And I think we look specifically in our business to the refinisher.
So, when cars get turned back in after use and they're going to be sold at auction later, we are seeing a pretty significant pickup with some of our customers in that area. So, that's probably up at least 25%. And that usually is a little bit of a precursor to what's going to be happening with the general state of the market. So, again, I think we see the refinish business is stable, albeit at a little bit lower level at this point. We don't see that fluctuating too much. We get a little outside of Q1, this destocking event with that customer will be behind us.
It is important to reference at least in North America, there was another merger going on between two distributors in the U.S., which are either the number one, number three, or number four distributors of paint that are going to be coming together. But I think it all speaks to just the continued consolidation in this marketplace.
Yeah. And maybe just, are there any key differences between sort of the U.S. refinish environment versus the European refinish environment that you see?
So, Europe for us and refinish has actually held up very, very well. So, I mean, the insurance increases were not as significant in Europe as they have been in the U.S. It's a different go-to-market strategy too. It tends to be more direct, whereas in the U.S. market, you do work through distributors. So, it's a little bit more on the indirect side. So, inventory can move more in the indirect method than the direct method. But overall, Europe has been a pretty good market for us here this past year in refinish. And really, the story, if I look at just Axalta for 2025, the revenue, we're going to be down maybe about $200 million of revenue this year. A very significant amount of that really relates to just North America across all of our businesses.
And so, that's been the weak spot from what we've seen in our business.
And then maybe just to close the loop on refinish, could you just discuss how Irus Mix, Nimbus adoption have been progressing year to date and what sort of customer feedback and win rates you've gotten there?
Yeah. So, I think the Nimbus, maybe we'll start with that. That is a great platform that our team is excited about rolling that out. I think we're targeting over 40,000 locations or touch points by the end of 2026. So, we're executing on that. We're rolling that out. I think that's going to be a pretty significant game changer for us as we think about providing information to all of our customers, an ability for automatic ordering to take place. It also unlocks being able to sell more than just paint as part of this opportunity. So, I would say the Nimbus rollout is going according to plan, and next year is going to be a very big year for us. Irus Mix, I think we continue to kind of progress that. I think it's probably not moving as quick as we want it.
Part of that was some tariffs earlier in the year that we figured out, but I think that's another part of what we're going to be moving at speed with as we get into 2026.
Got it. And just in terms of, I guess I'll keep going on refinish, just in terms of the go-forward strategy, you have this pending merger. Just, there's been a willingness both organically and inorganically to try to move into downstream, mainstream, and economy rather. Is that still the case? Do you still feel good about that strategy?
100%. So, I think that's where if you look at the amount of body shop wins through the third quarter, we've already won 2,500 body shops. Typically, we get that in a full year. The reason we're out of plan is that growth in mainstream and economy. So, we were always on a market share basis running maybe in that 10% plus or minus category in economy. And I think the commitment with we did that acquisition over a year ago with CoverFlexx is opening more and more opportunities for us. And that path that will continue as we get into 2026 and beyond.
Got it. And maybe just pivoting to industrial business, obviously wood coating is a big part here. And looking ahead to 2026, what sort of expectations or visibility or improvement of demand in a potential rate cut environment and maybe highlight some of the ways that you're winning new business or optimizing the portfolio to have more of a standalone margin story here?
Yeah. So, I think what the team has done internally has been really a phenomenal amount of work. So, in a pretty tough end market the last three years in industrial, we have doubled our EBITDA margin. So, a huge focus on cost, how we go to market has been kind of the keys to success. There's some we talked several years ago about maybe moving away from a certain part of our revenue within industrial because it wasn't at the right margin target. So, the team has executed on that. And I think now we kind of find ourselves in more of a position of really focusing more on growth. And so, yes, if there's further rate cuts and there's some momentum finally in building construction, I think that potentially could be a big tailwind as we think about next year.
I think as we're beginning to build the budget, we're not expecting a huge return yet. That's something that we'll continue to spend more time on and we'll provide more color on that as we kind of get into the full year 2026 discussion. But that is a, I think at some point, and I think people have been saying this for the last three years, candidly, that will change. And I think we're in a very good spot to take advantage of that because it's not only what we've done internally with the cost side, it's our plants that we are operating across the board are running at the best levels they've ever had in the company's history.
So, when we do our detailed scorecards, whether it's on safety, quality, delivery, costs, and people, we are across the board in all of the markets, we're performing as best as we ever can. So, we're ready for that volume uplift when that does occur.
Got it. And then just on commercial vehicles, can you just provide more color on expectations for EPA 2027 pre-buy in 2026? Any planned capacity investments ahead of anticipated growth? And maybe I'll save my question on the other side of this. You share this business as well.
Yeah. I would say on CV, so this, if you think about where we were maybe a year ago, year and a half ago, 2026 was going to be a watershed year for the commercial vehicle market here in the U.S. I think predictions at that time would be probably Class 8 production north of 350,000 units, which would put it at probably either the number one or number two best market. Today, if you kind of fast forward to where the current projections are, we're running way below replacement levels. We're 225,000. Some forecasts are down to 200,000. So, it's been a sea change as far as expectations for 2026. Now, with some of the more, the question will be if there's no changes from the EPA, does that begin to change a little bit? It's too early yet.
But I would say we have always viewed replacement levels in the trucking world in Class 8 in North America about 275,000 units. So, I think we're primed to move back to that. The question is, is it going to happen in 2026 or the second half of 2026 or is it more 2027? So, that's kind of open at this point as we think about it. But what's interesting though, as we think about just what we've done with the margin profile mobility, CV is a very, very good margin product for us. And that market has been down over 20% this year. And mobility as a segment is running margins that are close to 18% from an EBITDA margin perspective. So, we've done a lot with the business part of that.
I know your next question on CTS. A lot of that's how our team has executed, from whether it's on pricing initiatives, but more importantly, what we've done on the cost side.
Yeah. And that CTS business has always surprised me because you see the headlines on Class 8, it's a good strong part of your mix, but it seems like a bright spot of the portfolio has been CTS. So, how do we think about that potentially developing into next year after you've had such a strong year this year?
Yeah. I think there's more room to run. So, I think the team is focused on that. Don't forget next year with the Brazil business continuing to ramp up, we will have incremental revenue growth just from that business as well. It's probably another $30-$40 million minimum of top line that will come in next year based off of that business that we won about a year ago at this point. So, I think our mobility team has performed very, very well. I think we talked about where the margins can kind of get to, but we're kind of running at really levels that the company has not run at a pretty long time period, and so now the focus for us and really the industry is, okay, where does that incremental growth begin to come from?
That's what we're going to be really focused on as we kind of get into next year.
Got it. And then maybe just to close on light vehicle, I guess maybe just first starting out with expectations for Axalta builds relative to global builds into next year and what you're seeing after you had some nice share wins this year as well.
Yeah. I think today as we look forward to 2026, we see light vehicle global builds probably in line with what they've done this year. I think you'll see a little bit of mix change between regions as we get into next year. So, I think the North America market for us anyway was lower. I think that's going to come back. Part of that was with some of the, if you go back earlier in year with some of the tariff news as OEs were beginning to shift production out of Mexico into the U.S.. It always takes time. A lot of those plants and OEs will be online and we'll have an advantage of that as we kind of get into next year. But again, I think we're excited about our Brazil business continues to perform very, very well, adding incremental revenue.
And then, as I think about the bright spot in mobility for us, it has been China for many, many years. And I will tell you the team continues to do a really, really great job of executing in the China market. And I think that's what we're planning for as we close out the A Plan.
Great. Well, please join me in thanking Carl Anderson from Axalta.
Thank you, Patrick.